Short Quiz (Based on Lecture 5 and 6 – Cost Management and Decision Making)

1. Contribution margin is defined as total sales revenue minus total variable costs.
True False

2. An increase in fixed costs will decrease the contribution margin.

True False

3. Break-even analysis assumes that:

(a) Total revenue is constant
(b) Unit variable cost is constant
(c) Unit fixed cost is constant
(d) All of the above

4. The contribution margin at the breakeven point:

(a) Is zero
(b) Is greater than variables costs
(c) In less than total fixed costs
(d) Equals total fixed costs

5. At the break-even point of 1,500 units, variable costs are £60,000, and fixed costs
are £30,000. What would operating income be if 1,501 units are sold?
(a) £20
(b) £40
(c) £90
(d) £140

Fixed costs/contribution per unit = break-even point in units

30,000/contribution per unit = 1,500 units; contribution = £30,000/1,500 = £20

If 1,501 units sold: 1,501 x £20 = £30,020

Income = contribution – fixed costs; Income = £30,020 - £30,000 = £20

6. If demand exceeds practical capacity, the process is a bottleneck.

True False

7. When a company has a scarce resource, they should allocate it all to the product that
will provide the highest contribution margin per unit produced.
True False
8. An increase in building insurance will result in an increase in the break-even point.
True False

9. A business has complete freedom when setting prices for products and services.
True False

10. Chocolate Extreme sells both hard candy and chocolate candy. The current sales
mix is 2 units of hard candy for every 3 units of chocolate candy. Hard candy has a
contribution margin of £4 per unit, while chocolate candy has a contribution margin of
£2 per unit. If fixed cost are £420,000 what are the total units sold at the break-even
point (rounded)?

(a) 56,000 units of hard candy and 84,000 units of chocolate candy
(b) 60,000 units of hard candy and 90,000 units of chocolate candy
(c) 67,200 units of hard candy and 100,800 units of chocolate candy
(d) 72,000 units of hard candy and 108,000 units of chocolate candy

Sales mix: 40% and 60%

WAUCM = (0.4 x £4) + (0.6 x £2) = £2.8
Break-even: £420,000/£2.8 = 150,000 units
150,000 x 0.4 = 60,000 units and 150,000 x 0.6 = 90,000 units

11. Ramirez Corp. sells a product for €10 per unit. The fixed costs are €240,000 and the
unit variable costs are 60% of the selling price. What sales would be necessary in
order for Flom Corp. to realize a profit of 10% of sales?

(a) €800,000
(b) €420,000
(c) €80,000
(d) €140,000

Sales Price = €10, VC = €6, Contribution = €10-€6=€4

Let X be number of units needed to be sold. If a profit is 10% of sales, it means
10% of each unit sold. 10% of sales price (€10) is €1. We can form the following
equation:

€10X-€6X-€240,000=€1X
Solve for X. X = 80,000 units
80,000 x €10 = €800,000
 12. Reyes Company produces a product that sells for £50. Variable manufacturing costs
are £22 per unit. Fixed manufacturing costs are £7 per unit based on the current level
of activity, and fixed selling and administrative costs are £4 per unit. A sales
commission of 10% of the selling price is paid on each unit sold. The contribution
margin per unit is:
(a) £28
(b) £23
(c) £21
(d) £12

Sales Price – VC = Contribution margin per unit

£50 – (£22+(£50 x 0.1)) = £23

13. You are given the following information concerning scarce resources of a particularly
high skilled computer expert in an for an audit firm

The best use of the computer expert's time is to work on:

(a) Audit Client
(b) Tax Client
(c) Write Up Client
(d) All clients will lead to equal profitability

Based on contribution margin per estimated work hour